Health Care Financing and Organization Grant Recipient Works to Understand What the Uninsured Pay for Hospital Services

A Profile of Glenn A. Melnick, PhD

The problem. When uninsured patients seek care at a hospital, what does the hospital charge them for medical services? Additionally, when uninsured patients pay those bills, are they paying more than privately insured patients and Medicare patients for similar hospital services?

Health economist Glenn A. Melnick, PhD, wanted to answer these questions, and his interest led him to explore how hospital pricing policies affect patients without insurance.

An economist turns to health. Melnick, a professor of health care finance at the University of Southern California in Los Angeles and a consultant with the RAND Corporation in Santa Monica, specializes in research on health care competition, pricing and managed care.

An undergraduate economics major at the University of Massachusetts from 1970 to 1974, Melnick recalls that he "lucked out and took a course in health economics. It sounded interesting, and I projected correctly that this was an area that would grow and grow and grow, though at the time there wasn't even a health economics textbook. I tell my students that story today and note that there are two ways to succeed as an economist: one, be really good at what you do, and two, be the only one who does what you do. If you are smart enough to get into that second category, that's even better."

Melnick did his graduate work at the University of Michigan, studying urban and regional planning with an emphasis in health economics.

Early support from RWJF. The Robert Wood Johnson Foundation (RWJF) has supported Melnick's work in health care economics for nearly 30 years, beginning in the early1980s when Melnick received his first grant (ID# 12542) to study whether "market forces can impact the health care costs, and prices." Said Melnick, "At the time, I had to convince the RWJF program officer to let me study the topic. It was such a new concept."

HCFO seemed tailor-made for economists like Melnick and the burgeoning field of health care economics. Melnick's first grant from HCFO in 1990 (ID# 17563) explored the effects of competition and rate regulation on access to physician services and uncompensated care in New Jersey. In 1997, Melnick received another HCFO grant (ID# 32104) to study the extent to which hospitals reduce the amount of uncompensated care they provide when faced with financial pressures and competition from a growing managed care market.

By 2001, under a third HCFO grant (ID# 41289), Melnick focused on the impact of Medicare managed care (compared with Medicare fee-for-service) for Medicare HMO enrollees and especially vulnerable populations, those who might not know how to work the managed care system.

While working on this research, Melnick recognized "that with the way the market has evolved, uninsured consumers faced prices based on full-billed charges, which had inflated astronomically. As I got into it, I realized that there are strong incentives for hospitals to raise their billed charges. Medicare reimburses hospitals a portion of billed charges, so if they raise those charges they receive higher reimbursements. The same pattern followed under the managed care contracts—raising billed charges increased revenue."

"So there are powerful incentives for hospitals to increase charges and there are no constraints in the marketplace to stop them. The practice led to a tremendous run-up on billed charges in America. And these billed charges could potentially have a very serious negative effect on the uninsured population."

The project. From February 2006 through January 2008, under another HCFO grant (ID# 56528), Melnick took his cumulative research on hospital billing trends to the next level and studied hospital pricing and the uninsured—a topic he argues was primarily unexplored at that time. "Most, if not all, of health economics and policy literature had focused on pricing paid by the insured population," he says. "This study was one of the first to throw a light on what price competition means to U.S. health care consumers without insurance."

Melnick's study on hospital pricing and the uninsured addressed three main questions:

Is there evidence that uninsured patients are charged more than insured patients for similar services?

Is there evidence that uninsured patients pay more than insured patients for similar services?

If uninsured patients pay higher prices than insured patients, are the differences systematically related to factors such as type of hospital or financial status of the hospital?

For answers, Melnick researched public data available from the California Office of Statewide Health Planning and Development, which provided him with information on net revenues for uninsured patients and for insured payer groups from 2001 to 2005. The study sample included about 300 hospitals that collectively provided 80 percent of all care to uninsured patients in the state.

"The reason we focused on California is that the state has good data that allowed us to review what the uninsured were paying for hospital care. Only a few states in the country do that," said Melnick.

To produce the most stable measurements possible, Melnick and his fellow investigators averaged hospital price and collection data over two-year increments (2001–2002 and 2004–2005). They also adjusted calculations to account for the fact that uninsured patients are not evenly distributed across hospitals.

Findings from studying the uninsured. Melnick noted these key findings from the study:

Despite not having coverage, uninsured people use a significant amount of hospital care. In 2005, the uninsured used 5.5 percent of all hospital care in California.

For the period studied, the hospitals collected on average a higher percent of charges from uninsured patients than they collected from either Medicare or Medicaid for patients covered by those programs. For instance, in 2001, uninsured patients paid an average of 39 percent of their charges, commercial insurers paid 41 percent, Medicare paid 35 percent, and Medicaid paid 30 percent.

Uninsured patients paid higher prices than Medicare patients: they paid 18 percent more in 2001–2002 and 20 percent more in 2004–2005. Prices paid by uninsured people have increased along with prices paid by Medicare.

Despite some moderation in hospital prices billed to uninsured patients, actual net prices paid by these patients increased. During the study period, Centers for Medicare & Medicaid Services (CMS) payment increases allowed Medicare payments to hospitals to increase by approximately 13 percent, while prices charged to uninsured people were 18 to 20 percent greater than those for Medicare patients. Melnick calls this finding "disturbing."

He noted that the finding about hospital collections was "surprising, absolutely. At the time of the study, hospitals collected less from the uninsured than the [privately] insured—but more from the uninsured than from Medicare patients. Many hospital chief financial officers believe that they collect very little from the uninsured. The conventional wisdom is that we get pennies on the dollar from the uninsured, and most believe that. It was an eye opener that they were collecting so much more from the uninsured than from Medicare."

When President Obama's health care plan is fully implemented, Melnick notes: "there will be millions of uninsured who will become insured, and we won't face this problem of pricing." However, he still believes that millions will be left without insurance, even under health care reform. For this reason, Melnick continues to reference the findings from his HCFO study to argue for transparency in reporting about hospital pricing and collections.

For instance, Melnick notes that his HCFO project on pricing and the uninsured contributed to and supported reporting changes in California, which adopted a Hospital Fair Pricing Act of 2006. The act limits the amount hospitals in California can charge patients who are either uninsured or underinsured, and prohibits hospitals from charging those patients more for care than they could charge Medicare.

"I would like to see government regulations that mandate hospital reporting, not only of who the hospitals treat but also of how people without insurance are treated, what they are charged and what they actually pay," says Melnick, who has testified at the invitation of the House Ways and Means Committee regarding hospital pricing to the uninsured. "Most people don't realize what is going on. If the information I propose is out there, newspapers would get it and publicize it and that could produce tremendous pressure and feedback to bring the hospitals in line. It's hard to come up with a single regulation that fits every circumstance, but in general, in health care, I would want a lot more mandated reporting, a lot more transparency."

Melnick's perspective. With 30 years of funding from RWJF—including another 2008 HCFO grant (ID# 56110) to study how differences in health plan concentration affect hospital prices, costs, capacity, outcomes, and services to uninsured people—Melnick says he has been able to "explore areas that are new, that had the potential to be important but hadn't been documented yet. So I really congratulate the Robert Wood Johnson Foundation in terms of its courage to continually fund things for me that were not guaranteed to show results. But most of the time, we did. And we shined a light on things that had not been looked at and documented before." For a complete list of Melnick's HCFO-funded work, see his Awarded Grants page.

RWJF perspective. The Changes in Health Care Financing and Organization (HCFO) initiative supports investigator-initiated research, policy analysis, and evaluation projects that examine major changes in health care financing and organization, as well as their effects on cost, access, and quality. Launched by RWJF in 1989, HCFO strives to bridge the health policy and health services research communities by providing public and private decision-makers with usable and timely information on health care policy, financing, and market developments; and by bringing together the policy and research communities through significant convening, issues identification, research translation, and communication activities.

"HCFO provides the evidence we need to look at the impact of health care policy changes, as well as the impact of how these policies are implemented," said Nancy Barrand, HCFO program officer and special adviser for program development at RWJF. "HCFO projects help us understand whether or not health care policies are effective, whether or not they are cost effective, and whether or not they are doing what they are supposed to do. Through HCFO projects, we can understand what works, we can measure the impact of changes in the health care market, and we can better understand how policies can be implemented and what those policies should be."